On Friday, the SEC announced settled charges against five registered investment advisers for violations of the agency’s Marketing Rule, specifically targeting the firms’ advertisements of hypothetical performance to the general public. All five firms agreed to settle the SEC’s charges and will pay $200,000 in combined penalties.
The five advisory firms are:
- GeaSphere LLC;
- Bradesco Global Advisors Inc;
- Credicorp Capital Advisors LLC;
- InSight Securities Inc; and
- Monex Asset Management Inc.
This is the second set of cases that the SEC has brought as part of an ongoing targeted sweep concerning Marketing Rule violations. Nine advisory firms were charged in September 2023.
Hypothetical performance, misleading claims
The SEC’s orders found that the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience.
“Today’s actions … also serve as a reminder of the benefits to firms that take corrective steps before being contacted by Commission staff.”
Corey Schuster, Co-Chief, SEC Enforcement Division Asset Management Unit
According to the order, GeaSphere also violated other regulatory requirements, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements.
The order further found that GeaSphere committed recordkeeping and compliance violations and made misleading statements about its performance to a registered investment company client and that the misleading statements were included in the client’s prospectus filed with the SEC.
Bradesco, Credicorp, InSight, and Monex received reduced penalties because of the corrective steps they undertook in advance of being contacted by the SEC staff.
“The Marketing Rule’s provisions are crucial to protecting investors from misleading advertising claims,” said Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Today’s actions show that we will continue to employ targeted initiatives to ensure that investment advisers fully comply with their obligations under the rule. They also serve as a reminder of the benefits to firms that take corrective steps before being contacted by Commission staff.”
GeaSphere’s compliance issues
Like the other investment advisers cited in this sweep, the SEC said GeaSphere violated various provisions of its amended Marketing Rule (Rule 206(4)-1), which was adopted in December 2020 and had a compliance deadline of November 4, 2022 for registered investment advisers.
The SEC said the small, Rhode Island-based investment adviser did so by:
- making false and misleading claims about its performance;
- failing to present net performance information alongside gross performance;
- being unable to substantiate performance claims upon demand by the Commission;
- advertising hypothetical performance on its public website without adopting and implementing required policies and procedures, and
- failing to enter into written agreements with “finfluencers” – those persons being paid to offer endorsements.
In addition, the regulator said GeaSphere made misleading statements about its performance to its registered investment company client, which were incorporated in the client’s prospectus that was filed with the SEC in October 2021.
It also did not maintain copies of advertisements that appeared on its website, nor maintain books and records demonstrating the calculation of performance in its advertisements.
GeaSphere also failed to conduct an annual review of its compliance policies and procedures required under Commission rules and failed to implement certain of those policies and procedures, the SEC alleged.
Within 30 days of the entry of the SEC’s order, GeaSphere must conduct an annual compliance review and complete relevant compliance training, in addition to instituting the corrective measures to its advertisements (and certifying this has happened) that were required of the other four firms in this sweep enforcement.
Penalties
Without admitting or denying the SEC’s findings, all of the firms consented to the entry of the orders.
GeaSphere agreed to pay a civil penalty of $100,000. Bradesco, Credicorp, InSight, and Monex agreed to pay civil penalties ranging from $20,000 to $30,000, which reflected certain corrective steps taken by each of these firms prior to being contacted by the Commission staff.
Those remedial efforts at the four entities credited with them revolved around those firms removing the advertisements containing hypothetical performance from their public websites prior to being contacted by the SEC staff.
Marketing Rule enforcement debut in 2023
In charges that marked the first violation of the agency’s amended Marketing Rule, the SEC announced charges against Titan Global Capital Management USA LLC last August.
The New York-based fintech investment adviser was charged with using hypothetical performance metrics in advertisements that were misleading, plus compliance failures that led to misleading disclosures about custody of clients’ crypto assets, use of improper “hedge clauses” in client agreements, unauthorized use of client signatures, and the failure to adopt policies concerning crypto asset trading by employees.
In that enforcement, the SEC stressed that in offering and marketing complex strategies to existing and prospective employees, investment advisers must make sure their disclosures are accurately made to existing and prospective investors and that the use of hypothetical performance metrics is permitted – but only if advisers comply with requirements reasonably designed to prevent fraud.